“Too low they build, who build beneath the stars.”

– Edward Young – an English poet

AFC Funds Performance Summary

Asia Frontier Capital celebrates its 10 Year Anniversary

We are proud to celebrate our 10 Year Anniversary in June 2023! Asia Frontier Capital was established in June 2013 with the AFC Asia Frontier Fund and a decade later we now have four funds under management. Besides the AFC Asia Frontier Fund, we also successfully launched the AFC Iraq Fund, the AFC Uzbekistan Fund, and the AFC Vietnam Fund, and most importantly: all our funds have significantly outperformed their respective benchmarks since inception! Over the last 10 years, we have also built up an on-the-ground presence in Iraq, Uzbekistan, and Vietnam while being based in Hong Kong.

Our passion for Asian frontier markets led us to grow and expand in the past decade and we would like to take this opportunity to sincerely thank all of our investors for the support. We enthusiastically look forward to taking Asia Frontier Capital to even greater heights in the next decade!

Interest Rate Cycle Turning in Asian Frontier Markets

We have consistently mentioned in our last few quarterly webinars that central banks in our universe are done with their interest rate hiking cycle, and we could possibly see a pause or cuts in interest rates in 2023. Over the past month, three central banks in our universe cut interest rates, with Georgia, Sri Lanka, and Vietnam reducing benchmark interest rates by 50, 250, and 50 basis points, respectively.

The U.S. Fed turning less hawkish going forward and Asian frontier central banks following that cue should be positive for investor sentiment as the high-interest rate environment was one of the key headwinds to our markets last year.

Asian frontier markets have been anticipating a reversal in the interest rate cycle trend, which is seen in the positive performance of all AFC Funds so far in 2023. However, there is still much more upside given the very attractive valuations in our universe.

Asian Frontier Central Banks Reducing Interest Rates should be Positive for Investor Sentiment (Cut in Benchmark Interest Rates in Basis Points in May/June 2023)

Mark your Calendar: Second AFC Uzbekistan Fund Investor Tour

We are going to hold the second AFC Uzbekistan Investor Tour from Sunday 24^th September 2023, to Wednesday 27^th September 2023. On Sunday, we will organise a sightseeing tour around Tashkent, followed by company visits on Monday and Tuesday, including meetings with government officials and organisations. On Wednesday, we will organise a day trip to Samarkand. Please stay tuned for more detailed information in the next couple of weeks, and drop us a line at This email address is being protected from spambots. You need JavaScript enabled to view it. to register your interest.

The next cut-off date for subscriptions for our funds is 26^th June 2023. If you would like to know more about the subscription process, please get in touch with us at This email address is being protected from spambots. You need JavaScript enabled to view it. 

Please find below the managers’ comments on each of our four funds for May 2023.

AFC in the Press

Upcoming AFC Travel

Thomas Hugger, Ruchir Desai, and Peter de Vries are based in Hong Kong, while Andreas Vogelsanger is based in Bangkok, Vicente Nguyen in Ho Chi Minh City, Scott Osheroff in Tashkent, and Ahmed Tabaqchali in London and Iraq. If you have an interest in meeting with our team at their homeports or during their travels, please contact Peter de Vries at This email address is being protected from spambots. You need JavaScript enabled to view it..

AFC Travel

AFC Vietnam Fund - Manager Comment

The AFC Vietnam Fund returned +3.4% in May with a NAV of USD 3,123.47, bringing the year-to-date return to +8.3%. The fund outperformed its benchmark, the Ho Chi Minh City VN Index, which gained 2.4% in May 2023 and has gained 7.4% year to date in USD terms. The fund’s annualised return since inception stands at +12.8% p.a. The broad diversification of the fund’s portfolio has resulted in an annualised volatility of 14.87%, a Sharpe ratio of 0.78, and a low correlation of the fund versus the MSCI World Index USD of 0.48, all based on monthly observations since inception.

Market Developments

It is worth noting that the AFC Vietnam Fund has significantly outperformed the VN-index and most other funds since its inception on 23^rd December 2013. Over a span of nearly 10 years, the fund has achieved a remarkable 212.3% return, outshining the 89.9% return (in USD terms) of the VN-Index. This impressive performance underscores the fund's ongoing ability to outperform the market, primarily attributed to its robust portfolio construction.

AFC Vietnam Fund Continues to Outperform

Vietnamese Government Stimulus Measures:

The Vietnamese Government, particularly the State Bank of Vietnam, has recently implemented several measures to stimulate the economy. These actions include:

• Reduction in deposit interest rates: The deposit interest rate has significantly decreased from 10-11% in January to approximately 7-8% in May for 12-month deposits. Additionally, the State Bank of Vietnam purchased around USD 4 bn to bolster foreign reserves and injected over VND 100 trn into the market. These actions have improved banking liquidity and contributed to a significant drop in interbank rates, although lending rates decreased at a slower pace.
• Value added tax (VAT) cut: The National Assembly has agreed with the Government to reduce the VAT by 2%, from 10% to 8%, excluding banking, real estate, and securities services. This policy, effective from July, is expected to stimulate consumption and private investment in the third quarter.
• Real estate sector support: The government has introduced various policies to assist real estate developers and increase liquidity in the sector. Notably, the government has granted "house use right certificates" for condotel projects that were previously ineligible for this privilege.
• The VIII power master plan: The Vietnamese Government approved the VIII power master plan, outlining its long-term vision for energy development until 2050. The plan prioritizes renewable energy sources such as wind power, solar power, and other green energy. By 2050, renewable energy is projected to contribute over 70% of Vietnam's energy needs, aligning with the country's commitments at COP26. Moreover, the master plan facilitates existing renewable energy projects in selling electricity to EVN, the state-owned electricity company. This provision offers a lifeline to projects with billion-dollar investments.

All these government actions have certainly bolstered investor confidence in Vietnam. However, the headlines in May were dominated by concerns surrounding the drama in the U.S. regarding the "debt ceiling expansion" and the potential far reaching consequences if a deal was not reached. The media's repeated emphasis on this issue created apprehension among investors. Fortunately, an agreement was reached just in time by the end of the month, leading to a significant improvement in investment sentiment and strong gains with increased liquidity in the month’s final trading days. Additionally, U.S. inflation has decreased as expected, leading many analysts to speculate that the Federal Reserve may not raise interest rates again in June. With rates potentially reaching their peak, the market appears to have bottomed out, and we anticipate a strong recovery in the second half of 2023 and 2024.

U.S. Inflation (%)

FDI into Manufacturing Reaches Record Level

Vietnam has experienced a remarkable surge in foreign direct investment (FDI) flows into the manufacturing sector, reaching the highest level since the onset of the COVID-19 pandemic in the first three months of 2023. Despite the adverse effects of the pandemic, Vietnam continues to attract substantial FDI, playing a crucial role in transforming the country into a prominent global production hub. Over the past five years, since Vietnam revised its 30-year foreign investment attraction strategy, FDI flows into the country have been consistently increasing.

Prime Minister Pham Minh Chinh Acknowledged the Success of its Foreign Investment Attraction Strategy During a Meeting in Hanoi

According to statistics from the Ministry of Planning and Investment (MPI), the registered FDI in Vietnam from January 2018 to 20^th April 2023 amounted to a total of USD 180 bn, equivalent to 40.3% of the accumulated investment capital over the past 35 years. As of April 2023, Vietnam had attracted 37,065 foreign-investment projects, with a total registered capital of USD 445.87 bn, of which USD 279.8 bn has been disbursed. Over the last five years, the total FDI disbursement reached USD 107.47 bn, accounting for 38.4% of the total disbursed capital over the past 35 years. On average, around USD 19-20 bn of FDI is disbursed annually during the reviewed period. Notably, in 2022, a record amount of USD 22.4 bn in FDI disbursement was achieved, further highlighting Vietnam's increasing prominence in global supply chains, particularly in sectors such as textiles, footwear, and consumer electronics.

Several multinational corporations have expanded their investments in Vietnam. Quanta Computer of Taiwan, a major MacBook manufacturing partner for Apple, recently signed an agreement with the People's Committee of the northern province of Nam Dinh to develop a large-scale computer production project in My Thuan Industrial Park, with expected investment capital of USD 120 mn. This marks Quanta's ninth factory globally and its first in Vietnam, indicating Apple's continued shift of production to the Southeast Asian nation. Similarly, Foxconn, another key Apple partner, plans to establish a new factory in the central province of Nghe An, expanding its production in Vietnam following successful investments in the northern provinces of Bac Ninh and Bac Giang. Samsung, a leading example of foreign investment in Vietnam, has invested a total of USD 20 bn in the country, while LG’s investments over the past five years amount to USD 7.5 bn. LG has consistently added capital to its factories, including LG Display, LG Innotek, and LG Electronics. Additionally, Lego Group of Denmark began construction of a project worth over USD 1.3 bn in Vietnam last year, marking another significant milestone.

The remarkable FDI inflows into Vietnam's manufacturing sector signify its increasing attractiveness as an investment destination and reflect the country's continuous efforts to enhance its business environment and infrastructure.

Small and Mid-Cap Stocks Leading the Market in the Next Two Years?

In the past two months, there has been a noticeable surge of investment in small and mid-cap stocks, leading to the outperformance of the small-cap index and mid-cap index over the key benchmark. Many of these smaller stocks experienced significant jumps of 50-70% within a short period. On the other hand, large-cap stocks such as banks, consumer goods, and major real estate companies did not exhibit as much movement, despite their decent business performance in the first quarter. The primary factor driving this trend is the limited money supply in the stock market compared to the substantial injections of funds seen in 2020-2021 when central banks worldwide injected billions of U.S. dollars into the economies. As a result, investors, particularly local individual investors, have shown a preference for investing in small and mid-cap stocks, rather than large caps.

Small and Mid-Cap Indices Outperformed

For instance, one of the larger holdings in our portfolio, Everpia Vietnam JSC (EVE), experienced a significant rally in May. Its share price surged by 31.2% from VND 14,100 per share to VND 18,500 per share, accompanied by substantial liquidity. The AFC Vietnam Fund, with a 7.7% ownership, is currently one of EVE's largest shareholders. The number of traded shares of EVE skyrocketed from around 50,000 shares to over one million a day, with nearly 5% of the company's outstanding shares being traded on 16^th May 2023. EVE has compelling fundamentals and a strong balance sheet, being the best-known bedding brand in Vietnam with its flagship brand, Everon. The company boasts more than 600 sales agencies throughout the country and achieves an annual revenue of VND 1,000 bn. The stock is in our view undervalued with a price-to-book ratio of 0.8x and a dividend yield of 5.5%.

EVE Share Price Increased Strongly in May

Interestingly, a similar situation occurred during the real estate crisis in 2012-2013. During that time, market liquidity plummeted to its lowest level in over a decade as the State Bank of Vietnam implemented a tightening of monetary policy to control inflation. The AFC Vietnam Fund, which primarily focused on the small and mid-cap segment, experienced considerable success during 2014-2015, when this segment outperformed large cap stocks. Now, a decade later, history appears to be repeating itself. The big cap segment is currently facing limited money supply, while the appeal of small and mid-cap stocks continues to grow. If this trend persists over the next two years, we are confident that the AFC Vietnam Fund will once again be able to outperform the market. As we have previously reported, we anticipate a growth story to unfold over the next five years following the real estate crisis. Consequently, our investment strategy has shifted from high dividend stocks with limited growth potential to strong growth stocks. In the past five months, we have already exited some high dividend stocks and entered some mid-cap stocks with promising growth potential. As an example, we recently reacquired a stock we previously owned, TNG Investment and Trading JSC (TNG). 

TNG is a mid-cap garment company with a total market capitalization of around USD 90 mn. It serves as an OEM clothes supplier for Decathlon, a French sporting goods retailer. Despite a 20% decline in Vietnam's garment export revenue due to weak consumption in the EU and U.S. during the first quarter of this year, TNG still managed to achieve positive results. In Q1, TNG's revenue increased by 5.9% to USD 57 mn, and its net profit also experienced a slight 15.7% gain, amounting to USD 1.9 mn. Currently, TNG is trading at a P/E of 6.6x and P/B of 1.2x, in our view quite attractive for a company with annual earnings growth of around 20%.

TNG Net Profit in the Last 5 Years (VND bn)

The State Bank of Vietnam (SBV) has recently implemented adjustments to several key policy interest rates, effective 25^th May 2023, in response to the government's call for interest rate reductions to support the economy.

Decision No. 950/QD-NHNN, dated 23^rd May 2023

• Refinancing rate: Decreased from 5.5% p.a. to 5.0% p.a. on 31^st March 2023.
• Discount rate: Decreased from 4.5% p.a. to 3.5% p.a. on 14^th March 2023.
• Overnight rate: Decreased from 6.0% p.a. to 5.5% p.a. on 14^th March 2023.

Decision No. 951/QD-NHNN, dated 23^rd May 2023, in accordance with Circular No. 07/2014/TT-NHNN

• Deposit rate cap for terms less than one month: Decreased from 1.0% p.a. to 0.5% p.a. on 31^st March 2023.
• Deposit rate cap for terms from one month to less than six months: Decreased from 5.5% p.a. to 5.0% p.a. on 31^st March 2023.
• Deposit rate cap for term deposits at People's Credit Funds and microfinance institutions: Decreased from 6.0% p.a. to 5.5% p.a. on 31^st March 2023.
• Deposit rate for terms of six months and above: To be adjusted by credit institutions based on market demand and supply.

Expected Consequences

According to Vietcap Securities, the third-largest stock broker in Vietnam, the SBV's decision to lower interest rates aligns with their recent communication, indicating further rate cuts if favorable conditions persist. Vietcap Securities believes that the rate cut is supported by several factors: (1) domestic inflation is under control, (2) liquidity in the banking system has improved, and (3) the Vietnamese Dong has appreciated against the USD since the beginning of the year.

Weak credit demand from retail customers was observed in Q1 2023, partially attributed to the high-interest rate environment. As the SBV initiated rate cuts in March 2023, there is typically a time lag before the cuts are reflected in lending rates. Vietcap Securities initially expected the rate cuts in March to gradually improve credit demand rather than produce an immediate impact. With the recent rate cut, they anticipate a stronger recovery pace, supporting their view that credit demand, particularly from retail customers, will rebound in H2 2023. This development enhances the likelihood of achieving the SBV's 14% credit growth target for the year. Overall, the SBV has reduced the policy rate by 100 basis points since the beginning of the year.

Furthermore, the SBV recently adjusted the exchange rate of USD/VND to 23,400, marking the first adjustment since December 2022. This adjustment was prompted by the abundance of USD in the banking system, leading the SBV to accumulate a foreign currency reserve of USD 6 bn.

At the end of May 2023, the fund’s largest positions were: Agriculture Bank Insurance JSC (7.5%), Military Insurance Corp (7.3%), and PVI Holdings (6.7%) – all three insurance companies, Minh Phu Seafood Corp (6.3%) – a seafood company, and VNDirect Securities Corp (6.1%) – an online brokerage firm.

The portfolio was invested in 54 names and held 4.2% in cash. The sectors with the largest allocation of assets were financials (44.5%) and consumer (38.6%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 9.41x, the estimated weighted harmonic average P/B ratio was 1.22x, and the estimated weighted average portfolio dividend yield was 4.82%. The fund’s portfolio carbon footprint is 6.61 tons per USD 1 mn invested.

AFC Uzbekistan Fund - Manager Comment

The AFC Uzbekistan Fund Class F shares returned +1.6% in May 2023 with a NAV of USD 1,804.41, bringing the return since inception (29^th March 2019) to +80.4%, while the return for the year stands at +3.9%. On an annualised basis, the fund has returned +15.2% p.a. with a Sharpe ratio of 0.98.

May saw the final announcement for the long-delayed rights offering of Uzbekistan’s largest steel company, Uzmetkombinat (TSE:UZMK), as well as continued broad buying in the stock market, resulting in positive performance this month.

AFC Uzbekistan Fund Valuations as of 31^st May 2023:

Uzmetkombinat Advances Rights Offering

While historical precedent in Uzbekistan’s capital markets has been for state-owned enterprises (“SOEs”) to increase equity capital by selling all new shares to the government at par value, thereby drastically diluting minority investors, since Uzbekistan “re-opened to the world” back in 2018, this has become a figure largely relegated to the past. 

In recent years, SOEs in financial services, consumer goods, and the industrial sectors have been providing pre-emptive rights for minority investors, which is a very basic, but nonetheless positive development in Uzbekistan’s capital markets development as it reinforces the government’s focus on improving minority shareholder rights.

For UZMK, on 16^th March 2023, the company’s supervisory board announced plans to issue additional ordinary and preferred shares in order to strengthen the company’s balance sheet in anticipation of a subsequent public offering to facilitate the financing of the capacity expansion underway which will increase annual steel output from 1 million to 2.5 million tons.

The announcement of the rights issue was registered with the Ministry of Economy and Finance on 5^th May 2023 and permits all shareholders in the share registry as of 16^th March 2023 to subscribe at the closing price on 3^rd March 2023, which was UZS 8,959.

UZMK is 88% owned by the government through the Uzbek sovereign wealth fund, the Uzbekistan Fund for Reconstruction and Development (UFRD). The UFRD will subscribe for the equivalent of EUR 140 million worth of shares. 

Now, while this is big news in the markets the past month, we will not subscribe due to one of the many ironies in frontier market investing. The rights issue has been planned for several months, according to a discussion at the 2021 annual general meeting of the company, and since then, retail investors - some of whom bought shares more than 50% above the rights issue subscription price - have been frantically selling. This has enabled the AFC Uzbekistan Fund to scoop up hundreds of thousands of dollars of cheap shares at up to a 6% discount to the offering price. Retail investors did not understand they would have pre-emptive rights to maintain their position in the company and were fearful of dilution, and we became very willing buyers during the panic selling that ensued. While the majority of this firesale has concluded, we can still pick up cheaper shares and therefore decided it would be more attractive to purchase shares on the open market than subscribe to the offering.

Nonetheless, we look forward to seeing the rights offering being successfully closed in June and the company continuing to advance toward bringing its new production capacity online over the next two years, which will not only lead to increasing revenues, but also to the return of the company’s historical dividend payouts, which has traditionally meant a mid-teens dividend yield.

At the end of May 2023, the fund was invested in 26 names and held 10.2% cash. The portfolio was allocated to Uzbekistan (89.7%) and Kyrgyzstan (0.1%). The sectors with the largest allocation of assets were materials (41.5%) and financials (33.0%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 4.65x, the estimated weighted harmonic average P/B ratio was 0.96x, and the estimated weighted average portfolio dividend yield was 4.03%.

 AFC Asia Frontier Fund - Manager Comment

The AFC Asia Frontier Fund (AAFF) USD A-shares returned −2.1% in May 2023 with a NAV of USD 1,288.56. The fund underperformed the MSCI Frontier Markets Asia Net Total Return USD Index (+0.3%), the MSCI Frontier Markets Net Total Return USD Index (−0.6%), and the MSCI World Net Total Return USD Index (−1.0%). However, year-to-date, the fund returned +5.5% versus +1.2% for the benchmark, an outperformance of 4.3%. The performance since inception on 30^th March 2012 now stands at +28.9% versus the benchmark, which is down by 28.3% during the same period. The broad diversification of the fund’s portfolio has resulted in lower risk with an annualised volatility of 10.6% and a correlation of the fund versus the MSCI World Net Total Return USD Index of 0.51, all based on monthly observations since inception.

After five consecutive months of positive returns, the AFC Asia Frontier Fund took a breather in May. The decline this month was due to the AFC Iraq Fund, which after a stellar performance this year, was down -11.5%, which cost the AFC Asia Frontier Fund around -2.0% of performance in May. Excluding the exposure to Iraq, the fund performance would have been flat as the underlying portfolio and, in general, Asian frontier markets continue to display their lower correlation to global events. The fund’s portfolio saw gains in Pakistan, Sri Lanka, Kazakhstan, Uzbekistan, and Vietnam despite all major global indices being negative this month.

As we have been discussing in our last few quarterly webinars, the interest rate hiking cycle in Asian frontier markets is mainly done as the past aggressive interest rate hikes support the cooling down of inflation. Furthermore, with the U.S. Fed expected to be less hawkish going forward, central banks in our universe are gaining more confidence in managing their monetary policies independently.

Three central banks in the Asian frontier universe cut interest rates in the past month, starting with the National Bank of Georgia, which cut its benchmark interest rate by 50 basis points as inflation in Georgia has seen a steep decline in the past few months. 

The Interest Rate Cut in Georgia Does Not Come as a Surprise to Us – Inflation has Come Down Significantly

The State Bank of Vietnam (SBV) also cut its benchmark refinancing rate by 50 basis points, the second time in two months that the SBV has reduced interest rates. This move did not surprise us, as many public statements by the SBV and government officials earlier in the month called for lower interest rates to support the weak economic growth. With inflation in Vietnam looking increasingly under control, this interest rate cut can help the anticipated pick-up in economic momentum in 2024.

Inflation in Vietnam Is Under Control Allowing the State Bank of Vietnam to Cut Interest Rates Again

The Central Bank of Sri Lanka surprisingly slashed interest rates by a massive 250 basis points. However, this should be seen in light of the very aggressive increases in interest rates last year, in order to quell inflation, support the currency, and bring back macro stability.

Inflation in Sri Lanka has been declining significantly in the past few months as the lagged impact of higher interest rates flows through, commodity price pressures ease, and a stronger currency reduces import costs. It will not be surprising to see a further significant decline in Sri Lanka’s inflation in the second half of 2023 as the high base effect kicks in while the impact of the factors mentioned above continues to play out.

Sri Lanka’s macroeconomic prospects now look much better than at the start of the year as the International Monetary Fund deal has seen the light of day. Tourism and remittance earnings are seeing a solid recovery adding to foreign exchange reserves, while earnings should bottom out by the end of 2023. Ruchir will be in Colombo from 19^th to 21^st June and will report back on the continuing progress the country is making.

The Interest Rate Cut in Sri Lanka Should be Positive for Sri Lankan Equities

Overall, these changes in monetary policies should be positive for investor sentiment in Asian frontier markets as eventually, domestic liquidity could flow back into equities from fixed deposits.

Geopolitically, Asian frontier countries continue to gain importance as the first China-Central Asia Summit was held in the Chinese city of Xi’an reflecting Central Asia’s growing significance, especially post the Russia-Ukraine conflict. All Central Asian countries have important trade links with China, and we believe this economic relationship will only deepen further as China continues to gain a foothold in Central Asia while trade through Central Asia picks up as companies and countries look to diversify away supply chains from Russia.

The AFC Asia Frontier Fund is Well Exposed to Central Asia as the Region Gains More Importance – the China-Central Asia Summit was held in Xi’an, China on 18^th-19^th May 2023

The best-performing indexes in the AAFF universe in May were Vietnam (+2.5%) and Bangladesh (+1.2%). The poorest-performing markets were Iraq (−8.7%) and Cambodia (−7.2%). The top-performing portfolio stocks this month were a Pakistani food & beverage company (+30.6%), a Pakistani conglomerate (+28.6%), a Mongolian junior gold/copper miner (+21.4%), a Mongolian concrete producer (+17.6%) and another Mongolian concrete producer (+15.5%).

In May, the fund purchased a Vietnamese stock brokerage company, sold a Vietnamese gas producer and a Mongolian engineering company, added to existing positions in Mongolia and reduced positions in Cambodia and Mongolia.

At the end of May 2023, the portfolio was invested in 73 companies, 2 funds and held 5.1% in cash. The two biggest stock positions were a fintech company in Kazakhstan (4.4%) and a bank in Kazakhstan (4.0%). The countries with the largest asset allocation were Iraq (17.0%), Mongolia (14.9%), and Vietnam (12.3%). The sectors with the largest allocation of assets were consumer goods (20.5%) and financials (14.5%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 6.44x, the estimated weighted harmonic average P/B ratio was 1.10x, and the estimated weighted average portfolio dividend yield was 3.85%. The fund’s portfolio carbon footprint is 1.17 tons per USD 1 mn invested.

AFC Iraq Fund - Manager Comment

The AFC Iraq Fund Class D shares returned −11.5% in May 2023 with a NAV of USD 890.66 versus its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which lost 8.7% during the month. For the year, the AFC Iraq Fund is up 31.0%, outperforming the index’s increase of 24.9%. Since inception, the fund has lost 10.9% while the RSISUSD index is down 34.4%, an outperformance of 23.5%.

The AFC Iraq Fund, and the market, took a breather after a great three-month run from the January 2023 lows, during which the fund was up 49.1%, compared with the RSISX USD Index, which was up 43.8%. 

The market’s technical picture continues to be positive, with the pullback taking the index back to its three-year up-trending channel (first chart below). The macroeconomic fundamentals discussed here last year support our view that this uptrend will likely remain in force; however, its upward slope might moderate or even go sideways as it consolidates its gains before its next move higher. Supporting the consolidation thesis is the technical picture of the Rabee Securities RSISX IQD Index, the Iraqi Dinar (IQD) version of the Rabee Securities RSISX USD Index, which reflects a multi-month consolidation pattern (second chart below). 

The fundamental underpinnings for the market’s next move would come from the conclusion of parliament’s review of the 2023 budget proposal and its passage into law, expected in the next few weeks. The expansionary budget, after coming into force, would result in meaningful liquidity injections into the economy as a consequence of the oversized role of the government’s spending in the economy – which acts as an efficient and direct transmission mechanism of oil revenues into the real economy. Ultimately, this liquidity injection will feed into corporate profits, which in turn will provide the impetus for the market’s next move.

RSISX USD, and RSISX IQD Indices Versus Average Daily Turnover

Meanwhile, following months of upheaval, the currency is now showing tentative signs of stabilisation, with the premium of the parallel market rate over the official rate of the IQD versus the USD trying to settle at around 13% versus the peak of around 20% and the recent low of about 7% (green line in the lower half of the chart below). At the same time, volumes in the Central Bank of Iraq’s (CBI’s) daily USD-IQD transactions (upper half of chart below) continued to recover from the lows reached in November 2022 – which were brought about by the CBI’s introduction of new procedural requirements to those for its provisioning of USD for cross-border fund transfers (*). Supporting this stabilisation is the combination of measures by the government and the CBI to create demand for the IQD, and for furthering the adoption of banking in the economy – both of which have been increasingly gaining traction.

Volumes in CBI’s USD-IQD Transactions versus the USD/IQD Exchange Rate

The current 13% premium of the parallel market exchange rate over the official exchange rate is a consequence of the informal sector’s continued demand for USD that is not met at the official exchange rate through the banking system. Furthermore, it is too high versus the 1-2% levels that are consistent with a balanced supply-demand dynamic (green line in the lower half of chart above). As such, the 13% premium puts these informal companies at a significant competitive disadvantage versus those companies operating formally – accessing USD at the official exchange rate through the banking system. Consequently, providing the economic incentive for the informal companies to transfer to formality and access the banking sector for the first time, which should drive the premium lower in tandem with the transfer to formality. However, the still high degrees of informality, cash, and the dollarization in economic activities mean that these developments will continue to unfold over time.

These incentives, and the high transparency levels demanded by the CBI’s procedural requirements introduced in mid-November 2022, have benefited the higher-quality banks whose infrastructure is able to deal with the inflow of new clients and the subsequently increased volume of cross-border transactions. These developments are accelerating: (1) the shift away from informality that dominates the bulk of economic activities; and (2) the adoption of banking away from the dominance of cash as both a store of value and a means of economic exchange – a process that is positive for the investment thesis for the banking sector in Iraq as discussed here in “Banks & the Iraq Investment Thesis” in February 2022. 

The year-to-date performance of the AFC Iraq Fund, and the RSISX USD Index, signify the diversification benefits of the fund and Asian frontier markets, which have a low correlation with global markets, especially during this period of global market volatility and macroeconomic uncertainty. 

At the end of May 2023, the AFC Iraq Fund was invested in 14 names and had a cash level of 0.9%. The fund invests in both local and foreign-listed companies that have the majority of their business activities in Iraq. The markets with the largest asset allocation were Iraq (97.2%), Norway (1.4%), and the UK (0.5%).

The sectors with the largest allocation of assets were financials (69.9%) and communications (11.2%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 8.43x, the estimated weighted harmonic average P/B ratio was 1.01x, and the estimated weighted average portfolio dividend yield was 4.55%. The fund’s portfolio carbon footprint is 0.24 tons per USD 1 mn invested.

I hope you have enjoyed reading this newsletter. If you would like any further information, please get in touch with me or my colleagues at This email address is being protected from spambots. You need JavaScript enabled to view it.

With kind regards,

Thomas Hugger
CEO & Fund Manager

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Disclaimer:

This Newsletter is not intended as an offer or solicitation with respect to the purchase or sale of any security. No such offer or solicitation will be made prior to the delivery of the Offering Documents. Before making an investment decision, potential investors should review the Offering Documents and inform themselves as to the legal requirements and tax consequences within the countries of their citizenship, residence, domicile and place of business with respect to the acquisition, holding or disposal of shares, and any foreign exchange restrictions that may be relevant thereto. This newsletter is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law and regulation, and is intended solely for the use of the person to whom it is intended. The information and opinions contained in this Newsletter have been compiled from or arrived at in good faith from sources deemed reliable. Opinions expressed are current as of the date appearing in this Newsletter only. Neither Asia Frontier Capital Ltd (AFCL), nor any of its subsidiaries or affiliates will make any representation or warranty to the accuracy or completeness of the information contained herein. Certain information contained herein constitutes “forward-looking statements”, which can be identified by the use of forward-looking terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “project”, “estimate”, “intend”, or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of Funds managed by AFCL or its subsidiaries and affiliates may differ materially from those reflected or contemplated in such forward-looking statements. Past performance is not necessarily indicative of future results.

The representative of the Funds in Switzerland is ACOLIN Fund Services AG, succursale Geneve, 6 Cours de Rive, 1204 Geneva. NPB Neue Privat Bank AG, Limmatquai 1 / am Bellevue, CH – 8024 Zürich, Switzerland is the Swiss Paying Agent. In Switzerland, shares shall be distributed exclusively to qualified investors.  The fund offering documents, articles of association and audited financial statements can be obtained free of charge from the Representative. The place of performance with respect to shares distributed in or from Switzerland is the registered office of the Representative.

AFC Asia Frontier Fund is registered for sale to qualified/professional investors in Japan, Singapore, Switzerland, the United Kingdom, and the United States. AFC Iraq Fund and AFC Uzbekistan Fund in Singapore, Switzerland, the United Kingdom, and the United States. AFC Vietnam Fund in Japan, Singapore, Switzerland, and the United Kingdom. 

By accessing information contained herein, users are deemed to be representing and warranting that they are either a Hong Kong Professional Investor or are observing the applicable laws and regulations of their relevant jurisdictions.

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